Definition of shakeout

When over-supply in an industry forces smaller competitors to merge with or be acquired by larger players, or to exit the sector altogether. [1]

A shakeout is a fast drop in the number of independent producers in a given industry. Most shakeouts are accompanied by growth in industry output and average firm size, and are preceded by a fast rise in the number of producers. According to Jovanovic and MacDonald (1994), the reason for these changes is a technological innovation that dramatically increases the efficient scale of production.

One of the most notable shakeouts happened in the US automobile tyre industry before the Great Depression. Between 1922 and 1929, the number of independent producers dropped from 278 to 122, in spite of a fast growth in industry output.

According to Jovanovic and MacDonald (1994), what caused this shakeout was the invention of the Banbury mixer in 1916. This equipment, which is used for mixing rubber and plastic, increased the efficient scale of production. 

The US beer brewing industry experienced a similar phenomenon a few decades earlier. The number of producers dropped by 40% between 1880 and 1890. But perhaps the most famous shakeout was the one that characterised the US automobile industry in the early 20th century. The number of car manufacturers dropped from 274 in 1909 to 121 in 1918. [2]

Jovanovic, B. and MacDonald G. M., (1994), “The life cycle of a competitive industry,” Journal of Political Economy.

Horvath, M., Schivardi, F., Woywode, M., (July 2001), “On industry life-cycles: delay, entry, and shakeout in the beer brewing industry,” by International Journal of Industrial Organization, 19 (7), pp 1023-1052.

Klepper, S., Simons, K., (Fall 1996), "Innovation and Industry Shakeouts", Business and Economic History, vol. 25 no. 1, pp. 81-89.